Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, November 29, 2010

About 30 years ago, I read a book by Irwin Schiff (yes, THAT Irwin Schiff) called The Biggest Con in which he exposed Keynesian economics and declaring that the only "arrow in the quiver" of Keynesianism was inflation. As I read Paul Krugman's column today on Spain and its problems, I can see that if Krugman is the most public spokesman today for Keynesian thinking, then Schiff was correct. Let me begin.

In The General Theory, John Maynard Keynes argues that the standard supply-demand wage theory holds only if there is full employment of labor. However, if there is widespread unemployment, the way to get labor back to full-employment levels is to sneak in a general wage cut via inflation. Keynes writes:

...it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school. (Emphasis mine)

I believe that the concepts shown in this paragraph really are at the heart of Krugman's column today in which he says that Spain easily could get out of its present situation if it had its own currency and could engage in a devaluation which, in his view, would establish something close to full employment and boost Spanish exports. He writes:

Now what? If Spain still had its own currency, like the United States — or like Britain, which shares some of the same characteristics — it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve “internal devaluation”: it must cut wages and prices until its costs are back in line with its neighbors.

And internal devaluation is an ugly affair. For one thing, it’s slow: it normally take years of high unemployment to push wages down. Beyond that, falling wages mean falling incomes, while debt stays the same. So internal devaluation worsens the private sector’s debt problems.

What all this means for Spain is very poor economic prospects over the next few years. America’s recovery has been disappointing, especially in terms of jobs — but at least we’ve seen some growth, with real G.D.P. more or less back to its pre-crisis peak, and we can reasonably expect future growth to help bring our deficit under control. Spain, on the other hand, hasn’t recovered at all. And the lack of recovery translates into fears about Spain’s fiscal future.

Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not. Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere. Unless there’s a catastrophic bank crisis anyway — which seems plausible for Greece and increasingly possible in Ireland, but unlikely though not impossible for Spain — it’s hard to see any Spanish government taking the risk of “de-euroizing.”

The concept is strikingly similar to what Keynes wrote, although Krugman also exposes his own biases of aggregation in this column. After all, what happens when a government devaluates the currency? There is a cut in real wages, and while the goods denominated in that currency become cheaper relative to goods made elsewhere, nonetheless people at home do suffer a fall in their standard of living.

Like Keynes, Krugman argues that what he calls an "internal devaluation" is bad because real wages are cut and people can see firsthand that they are making less, and in countries like Spain that are dominated by labor unions, that spells trouble. However, an inflation-led "wage cut" tends to be less visible or less clear, even if the same thing, relatively speaking, is accomplished.

However, all of this assumes that the effects of inflation are exactly the same as a cut in wages and government spending. (Actually, Krugman believes that inflation is superior because, in his view, people spend more in the short term, which he claims gives an economy "traction," enabling it to move forward on its own.) According to Krugman, or at least what I ascertain through his columns, inflation does not distort the structures of production nor cause any internal dislocations.

This last point is important, because one can have such a view ONLY if factors of production are homogeneous. However, if there are malinvestments that come about through inflation, and these malinvestments over time become unsustainable, then there is a problem.

In a nutshell, that is a huge difference between Austrians and Keynesians. While the devaluation of which Krugman speaks might have some "good effects" at first, nonetheless, this "solution" only exacerbates the long-term problem. For example, within an economy, the wages that tend to be out-of-kilter with the rest of the economy often are centered in unionized industries, and when inflation hits, those sectors tend to be able to force employers (and the government, since these countries have powerful public sector unions) to give raises that better keep up with inflation than workers who either are not unionized or have weak or non-existent political connections.

Thus, the internal distortions are likely to grow. In countries like Spain, Greece, and Portugal, the very sectors that are bloated and are gobbling up resources are the government sectors. A bout of inflation in the long run then would further empower those very employment groups that are most responsible for the current trouble.

To a Keynesian like Krugman, none of this matters, as all sectors are homogeneous and there is no such thing as economic distortion. The only thing that matters are aggregate numbers, as economics to him is nothing more than charts, numbers, and aggregations. To "cure" an economy, give it a bout of inflation, and when the inevitable problem arise, deal with them via another bout of inflation.

When things deteriorate -- as they surely will -- then one blames the "greedy" corporations which, in the view of someone like Krugman, need to be reined in by activist government. All that is needed is to find the "Goldstein," demonize, rage on, and then inflate some more. In the end, THAT is the "Krugman solution."

Friday, November 26, 2010

Whenever I read one of Paul Krugman's columns, I don't expect to be in agreement, so I am pleased when he makes points that I believe are spot on. However, somewhere through the column, he suddenly makes a turn in which the entire thing is turned into a giant non sequitur that leaves me scratching my head to his logical progressions.

For example, in 2003, he wrote a column in which the theme was the "Lump of Labor Fallacy," which tends to be the underlying theme that labor unions present in their worldview. Throughout the column, he lays out the intellectual case debunking this fallacy, but then writes this:

Since 2001, sensible economists have been pleading for federal aid to state and local governments so schoolteachers and police officers needn't be laid off because of a temporary fall in revenues. They've also urged the administration to stop dragging its heels on much-needed homeland security spending, not just because such spending is needed to make the country safer, but also because it would create jobs and put more income into the hands of Americans likely to spend it. (And if you're worried about spending's leading to increased deficits, why not cancel some of those long-run tax breaks for upper brackets?) Until we've done the obvious things, there's no reason to despair about job creation.

I remember my reaction the first time I read it: Say what? The intellectual basis behind calling the "Lump of Jobs Fallacy" a fallacy is that we apply theories of division of labor and marginal utility and, yes, the Law of Scarcity. Krugman, on the other hand, tied it to a Keynesian notion that more spending creates jobs and prosperity.

(In fact, Krugman's view of "jobs" is that a "job" is something we do and its main purpose is for an avenue of income to boost spending. He does not tie the production aspect of work to production of goods themselves as the basis for our purchasing power. Instead, we get an amorphous view of "spending" that has only a loose connection to production.)

Thus, it is today in Krugman's "Eating the Irish" column. He begins on a strong note, but then veers off the Keynesian cliff in a way that leaves me scratching my head.

First, I begin with the sound part:

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

I fully agree and hold that there should have been NO bailouts, but that also includes the bailouts that occurred in this country. Not only do I believe that Wall Street should have been on the hook for its role in creating and sustaining the Housing Bubble, but I also believe that had the Bush and Obama administrations permitted that to happen, we would not have had the Great Implosion that everyone (including Krugman) predicted.

Yes, it would have been difficult as the markets sorted out which firms had solid assets and which had worthless paper, and some CEOs would have lost their mansions in Connecticut. However, it would not have taken long to liquidate the malinvested assets, and we would be well on our way to a real recovery instead of the stagnation that we have now.

Unfortunately, after this paragraph, Krugman veers off into, well, Krugmanism. He writes:

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment. (Emphasis mine)

So, while taking on the obligations that the government should not have taken on in the first place, the Irish government then should have increased spending? With what? Tax revenues fell and the Irish government could not print Euros, so all it could have done was to borrow, and somehow I doubt that the world was anxiously awaiting the acquisition of more Irish government debt.

Furthermore, his contention that spending cuts "caused" the recession is utterly laughable. Is Krugman claiming that had Ireland continue to spend at current levels or even boost spending (With what?), that Ireland would not have experienced a recession? Krugman's statement is a classic non sequitur, something that a competent economist should not be pursuing. He goes on (unfortunately):

In early 2009, a joke was making the rounds: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.” This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn’t be compared with the utter disaster that was Iceland.

But at this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump. (Emphasis mine)

First, I doubt that Iceland is exactly wallowing in prosperity at the moment. The imposition of capital controls hardly is a solution, no matter what Krugman thinks. It is a statement that the government owns one's property, period. The only reason that governments impose capital controls is that those in power want to steal property of others and the only way to do it is to keep it in the country where government agents can find it.

This is the financial version of the Berlin Wall, and it is theft, pure and simple. Why am I not surprised that Krugman endorses this action?

As for the currency issue, there is some truth in that matter, but Krugman leaves out something important: Iceland may be able to repudiate some of its obligations via currency devaluations (which really is a sophisticated way of saying it is printing more money and impoverishing anyone whose wealth is held in Kronas), but it is less likely to attract future investment from outside the country. In other words, it trades a temporary fix for future problems.

However, since Keynes himself declared that "In the long run, we all are dead," I guess that even if short-term actions hold long-term consequences, we should not worry. That will be someone else's problem.

Monday, November 22, 2010

On a recent appearance on ABC's "This Week," Paul Krugman spoke glowingly of what he called "death panels." In fact, he referred to "death panels" as a "real solution" in helping to get a "real solution" to federal budget problems. He really did say that, but Krugman being Krugman quickly made a posting on his blog that declared that he really did not mean exactly what he said even though, frankly, he meant exactly what he said.

What was significant about that whole affair was that Krugman and his friends and admirers for the last two years have called Sarah Palin a liar because she said that federalizing medical care ultimately will feature what she called "death panels." Krugman called the idea a "complete fabrication," except that he obviously understood all along that a U.S. government medical care program, which would be responsible for determining who receives medical care, would emulate those Europeans Krugman so much admires, and those countries have death panels.

Now, you might think that the prospect of this kind of standoff, which might deny many Americans essential services, wreak havoc in financial markets and undermine America’s role in the world, would worry all men of good will. But no, Mr. Simpson “can’t wait.” And he’s what passes, these days, for a reasonable Republican.

Now, I am no fan of Alan Simpson and really don't take anything he says very seriously. Yes, he and Erskine Bowles co-chaired a "Deficit Commission," which also was nothing less than one of the dog-and-pony shows that Washington brings out once in a while to dazzle the media and to tell the taxpayers that Washington Is Serious About Cutting The Deficit.

Yes, I am sure that some Republicans are going to make noise when the debt limit has to be raised this coming spring in order for the U.S. Government to continue borrowing at unsustainable levels. Furthermore, after a few members of Congress engage in The Usual Grandstanding, demand some "concessions" from President Obama (which he will ignore after making public show of concern for the deficit), Congress will vote to extend the debt limit and go on its merry way.

In the past, we even have had to veritable "train wreck" in which the debt limit passes and (horrors) THE GOVERNMENT SHUTS DOWN. Except that it really does not shut down. Yes, they make a big show of closing the Washington Monument, and I am sure that there would be a few other high-profile, low-impact closings in order to try to convince people that Their Savior Is Not Operating, and the Usual Suspects in the media will play Their Usual Role in telling us we're doomed unless Washington can spend more.

As Krugman continues his role as a partisan shill, he gives us this gem:

...the G.O.P. opposes anything that might help sustain demand in a depressed economy — even aid to small businesses, which the party claims to love.

Right now, in particular, Republicans are blocking an extension of unemployment benefits — an action that will both cause immense hardship and drain purchasing power from an already sputtering economy. But there’s no point appealing to the better angels of their nature; America just doesn’t work that way anymore.

I had not realized that he was getting ready to trot out the unemployment benefits canard again. Now, if Krugman really were to believe this "demand" nonsense, I wonder why he does not endorse Washington just creating a few trillion dollars or more and just leaving the sacks of money at our doorsteps just before Black Friday. You want spending? We'll GIVE you spending!

Yes, yes, we know. Had the government spent $1.2 trillion instead of $800 billion for its "stimulus" efforts, we would be in a full-blown recovery by now. All for the want of $400 billion, and now the Evil GOP wants to end any more "stimulus" efforts and destroy the world.

Let's sum it up. Krugman uses the actual term "death panels" but really does not mean "death panels," except we know that he does. Alan Simpson uses "blood bath" and he obviously means every word. Emmanuel Goldstein lives!

Friday, November 19, 2010

One of the reasons that I continue to write on this blog has been Paul Krugman's constant contention that anyone who believes he is wrong does not really believe Krugman is wrong. The only reasons for opposing Krugman's statements, according to Krugman, is that a person is Really Stupid or, more likely, just plain evil.

Furthermore, I have watched him constantly rewrite the history of financial deregulation in which he has claimed that all of the deregulation occurred under Ronald Reagan when, in fact, most of the original work was done before Reagan took office, and under the direction of Democrats. I also have noted that deregulatory efforts of Congressional Democrats took place because the system at the time, dominated by internal markets, was too stratified and too inefficient to deal with the kind of investment that would be needed as high technology was rapidly advancing.

So, in reading Krugman's column today, I admit I am not surprised when he claims that the only reason that Republicans, China, and Germany are raising serious issues about the so-called QE2 is that they want to see other people suffer. (Yes, he does have a qualifying phrase, but I never have read anything by Krugman that has claimed that anyone who disagreed with him came by it honestly. At best, anyone who carries a contrary view does so out of absolute stupidity at best and venality at worst.)

He writes:

So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.

Now, I would say there is a good bit of hypocrisy, and I certainly am not going to shill for Republicans, given that they helped produce the Housing Bubble, although the Democrats that ran Congress from 2007 on certainly played their irresponsible role, too. A plague on both their houses! Moreover, when I read Sarah Palin's letter to the Wall Street Journal, I find it interesting that the same person who shilled for the TARP now has suddenly discovered "sound money." So, she was for monetary irresponsibility before she was against it. And I have no doubt that had John McCain been elected (and, thus, driving me to drink), he would be following pretty much the same course as Obama, except he would have diverted "stimulus" money to his supporters instead of Obama's -- and Palin would have been parroting the policy as McCain's VP.

However, when Krugman (and now Bernanke) and others claim that the current economic depression in this country is due to China's own monetary policies, then someone needs to go back to school. Henry Hazlitt wrote that inflation, which gives the "good effects" first (a temporary surge in buying and employment) and the "bad effects" later (higher prices, malinvestments, and unemployment) is like the "Dead Sea Fruit" which turns to ashes in one's mouth. He also wrote the following about the use of inflation, with the great inflation during the French Revolution (and the circulation of the infamous Assignats):

(The) world has failed to learn the lesson of the Assignats. Perhaps the study of the other great inflations - of John Law’s experiments with credit in France …; of the history of our own Continental currency …; of the Greenbacks of our Civil War; of the great German inflation that culminated in 1923 - would help to underscore and impress that lesson. Must we, from this appalling and repeated record, draw once more the despairing conclusion that the only thing man learns from history is that man learns nothing from history?

Of course, I am sure that Krugman would claim that Mr. Hazlitt simply wanted French people to be out of work. After all, it was Henry Hazlitt who carefully refuted Keynes' General Theory page by page and line by line. If Hazlitt, who knew the General Theory as well as any person alive wasn't convinced of its brilliance, then he could have come to his conclusion only because he didn't want people to have jobs.

One of the mantras of modern Progressives is that contemporary thought always is superior to any thinking that occurred in the past (especially if that thought is espoused by Progressives). Thus, the way to "win an argument" is simply to quote whatever was written or said a while ago and to assume it has to be wrong. (The exception, of course, is anything written by J.M. Keynes, who is treated as The Great Prophet.)

So it is in the Krugman blog post I have linked in which he quotes a passage from Joseph Schumpeter's work and then assumes that because Schumpeter wrote it in the past, that it amounts to advice from "the Dark Ages." Why? Well, because Krugman says so.

However, Schumpeter in that passage is addressing the point that inflation distorts the structure of production, creating malinvestments and bringing about maladjustments which cannot be sustained over time. So, using inflation to fight any depression simply prolongs the pain, and any short-term "gains" are wiped out longer term.

Obviously, since Krugman's mantra is "we need inflation," such words from Schumpeter are heresy. Furthermore, because Schumpeter wrote them many years ago, they automatically are wrong.

But I also have another problem. Krugman has been insisting that the reason the economy is in a funk is because the Obama administration pushed through an $800 billion "stimulus" instead of a $1.2 trillion spending package. Yes, for lack of $400 billion to be spent on political pet projects, the entire economy is sinking.

Krugman also insists that inflation will give the economy "traction," as though an economy is a perpetual motion machine that just needs a push from monetary authorities to move on its own. Where does he get that? Furthermore, the only way for his plan to work is for all assets to be homogeneous and for factors of production to automatically be able to adjust when done so administratively.

Does he know nothing about what happened with such economic planning in the former U.S.S.R.? There were economic planners who were as intelligent as Paul Krugman and who had doctoral degrees from Moscow State University, where the economics curriculum was every bit as rigorous as that of MIT.

Yet, the economy was a miserable failure, as planners could not negotiate simple goods through simple processes. Why? The economy lacked real prices that reflected the relative scarcity of factors of production. Instead, they believed that administered prices and production functions would take care of things, which never happened.

So, Paul Krugman demands the same for us. Have inflation distort prices, assume that factors of production are homogeneous, ratchet up government spending, and it will give us prosperity. Hey! It worked well for the U.S.S.R.

Fast forward to Krugman's November 14 appearance on ABC's "This Week" in which he not only claimed that the budget would need to get under control via controlling healthcare costs, but he specifically used the term "death panels" as a cost-controlling device. In his own words:

"Some years down the pike, we're going to get the real solution, which is going to be a combination of death panels and sales taxes. It's going to be that we're actually going to take Medicare under control, and we're going to have to get some additional revenue, probably from a VAT. But it's not going to happen now."

So, after having made fun of Palin, calling her a liar and worse, Krugman himself endorses such a thing. Obviously, he realized he was in hot water for his Freudian slip, so he quickly posted something on his NYT blog to minimize the damage.

He writes:

So, what I said is that the eventual resolution of the deficit problem both will and should rely on “death panels and sales taxes”. What I meant is that

(a) health care costs will have to be controlled, which will surely require having Medicare and Medicaid decide what they’re willing to pay for — not really death panels, of course, but consideration of medical effectiveness and, at some point, how much we’re willing to spend for extreme care

(b) we’ll need more revenue — several percent of GDP — which might most plausibly come from a value-added tax

And if we do those two things, we’re most of the way toward a sustainable budget.

So, the "death panels" really are not "death panels" even though Krugman calls them as such. Let's be realistic, folks. Paul Krugman really does believe that we need government-created "death panels," which will operate in the name of "lower costs." He actually believes they will help, even if he won't openly admit it -- except when he admits it.

Friday, November 12, 2010

Every once in a while, Washington trots out a "commission" that consists of Very Wise People Who Have Served In Government, happily gobbling up what taxpayers have provided. The "commission" meets (and meets and meets) and after a while, its members stand before the news cameras and announce that they have a Very Wise Pronouncement to make.

Not surprisingly, after the Very Wise Commission declares its Oracle, the Usual Suspects denounce whatever what was said, people go back to work, and the Report of the Very Wise People goes onto a shelf where it remains until the next Very Wise Commission is formed. Thus it is with the latest dog-and-pony show of Washington, the National Commission on Fiscal Responsibility and Reform.

Because nothing can occur in Washington without fanfare and moral theater, the latest Very Wise Commission has its website, photo ops, and even a report. These people -- who helped create the very conditions that we now face -- solemnly have told us that we need to pay higher taxes, cut spending, and live within our means. Obviously, even that (as phony as it might be) is financially and morally intolerable.

In the name of being an equal-opportunity annoyer, I present the side-by-side views of Paul Krugman and David Brooks, to columnists who really deserve each other. On the one side, we have an "economist" who hasn't a clue about capital or factors of production in general, who has no idea as to what entrepreneurship is, and really believes money is nothing more than a quantity variable to be placed within a mathematical algorithm.

On the other side, we have an Apostle of "National Greatness," that code term that comes from the Abbott and Costello of Neoconservatism, Brooks and William Kristol (who apparently is now a close adviser to Sarah Palin, Lord save us) telling us that we have to love "National Greatness" more than ourselves if we want to stay on this side of the cliff. It is hard to know where to begin, my day job beckons, and, dammit, it IS my birthday. However, duty calls....

Krugman is angry not because the commission has recommended this or that, but rather because the commission actually thinks that government should consume less, not more, of the country's wealth. He writes:

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

Should we make Social Security -- a true Ponzi scheme -- on more solid footing? Perish the thought!

Let’s turn next to Social Security. There were rumors beforehand that the commission would recommend a rise in the retirement age, and sure enough, that’s what Mr. Bowles and Mr. Simpson do. They want the age at which Social Security becomes available to rise along with average life expectancy. Is that reasonable?

The answer is no, for a number of reasons — including the point that working until you’re 69, which may sound doable for people with desk jobs, is a lot harder for the many Americans who still do physical labor.

But beyond that, the proposal seemingly ignores a crucial point: while average life expectancy is indeed rising, it’s doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age.

How does one "reform" a Ponzi scheme? I guess raise taxes, which solves everything. But Krugman does not stop there. No, he engages in what I think is a rather bizarre attack that apparently undercuts what he has been claiming on his pages: that ObamaCare actually will cut healthcare costs. Read on:

It’s true that the PowerPoint contains nice-looking charts showing deficits falling and debt levels stabilizing. But it becomes clear, once you spend a little time trying to figure out what’s going on, that the main driver of those pretty charts is the assumption that the rate of growth in health-care costs will slow dramatically. And how is this to be achieved? By “establishing a process to regularly evaluate cost growth” and taking “additional steps as needed.” What does that mean? I have no idea. (Emphasis mine)

It’s no mystery what has happened on the deficit commission: as so often happens in modern Washington, a process meant to deal with real problems has been hijacked on behalf of an ideological agenda. Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old — tax cuts for the rich and erosion of the social safety net.

Anyone who has read Krugman regularly knows that Krugman is a True Believer when it comes to Congressional Budget Office claims about the future of the cost of healthcare, now that the government will be controlling it. (See the chart below to get a better understanding of how this process will work. I'm sure you will conclude that the system is in very, very, very good hands.)

Now, why is it heresy for Krugman to claim that ObamaCare will cut costs, but it is not OK for Alan Simpson and Erskine Bowles to do the same? I don't know, although I do believe that any notion that what Congress passed earlier this year will cut anything but the quality and supply of medical care is ludicrous. Nonetheless, Krugman believes the CBO pronouncements like Jerry Falwell believed in Biblical inerrancy -- except when someone else who Krugman doesn't like says the same thing.

Then there is David "National Greatness" Brooks. What can I say, except to include the following from his latest column:

It will take a revived patriotism to get people to look beyond their short-term financial interest to see the long-term national threat. Do you really love your tax deduction more than America’s future greatness? Are you really unwilling to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?

Like the civil rights movement, this movement will ask Americans to live up to their best selves. But it will do other things besides.

It will have to restore the social norms that prevailed through much of American history: when narcissism and hyperpartisanship was mitigated by loyalties larger than tribe and self; when competition between the parties was limited and constructive, not total and fratricidal.

This movement will have to build institutions to support the leaders who make the hard bargains. As in the civil rights era, politicians won’t make big changes unless they are impelled and protected by a social upsurge.

Most important, this movement will have to develop a governing philosophy and a policy agenda. Right now, orthodox liberals and conservatives have their idea networks, and everybody else is intellectual roadkill. This coming movement will have to revive the American System: a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.

Like the chairmen’s report, this movement could demand that Congress wipe out tax loopholes and begin anew. It could protect federal aid to the poor while reducing federal subsidies to the upper-middle class.

The coming movement may be a third party or it may support serious people in the existing two. Its goal will be unapologetic: preserving American pre-eminence. It will preserve America’s standing in the world on the grounds that this supremacy is a gift to our children and a blessing for the earth.

There are some things that simply don't need a reply, as they are ridiculous enough on the face. Brooks' column is one of those things.

Tuesday, November 9, 2010

As I have commented before, a number of economists and commentators (and not just Austrians) have been loose with making predictions of hyperinflation, yet we don't see that happening in the real world. However, at the same time, we cannot ignore the fact that prices of a lot of things are going up -- and not just the price of gold, Krugman's "barbaric relic" comments notwithstanding. (Yeah, I know that line came from Keynes, but Krugman used it this week, too.)

In a blog post today, Krugman once again gloats about inflation, or the lack thereof, but then goes off on a weird tangent, talking about "grocery inflation." Now, I cannot recall in any of my grad classes there being a term called "grocery inflation," and being that the average grocery store has thousands of items, with some going up in price and other things not.

Nonetheless, especially in the aftermath of the voyage of the QE2, we have seen prices of commodities go up and, no, I believe Krugman is wrong when he goes off on the "commodity prices are volatile" tangent. No doubt, Krugman dismisses the run-up in gold and silver prices (not to mention oil, which is getting close to $90 a barrel in my last check.)

There also are some other issues here, and one has to remember that when Krugman and I speak of inflation, it is as though we were speaking different languages. Krugman's approach is purely macro-speak, with inflation being the measure of a particular index, i.e., the Consumer Price Index (CPI), the GDP Deflator, or something similar. (That is where he gets "grocery inflation," I guess.)

Austrians are more fundamental when it comes to inflation. To us, inflation is a situation in which the value of money falls relative to the goods for which it is used to purchase. In other words, inflation to us is a monetary phenomenon, not a price phenomenon. Instead, increases in prices reflect inflation (the loss of value of money), as when money loses value relative to other goods, more money then is needed to fulfill transactions.

Now, according to Keynesians, this is foolish, since to them, money is nothing more than a quantity variable. They may have an inkling of why money exists in the first place, but they are much more interested in aggregate variables, and certainly not anything that might smack of a marginal utility theory of money.

That being said, I will once again invoke the hated (by Keynesians) Say's Law to point out that while money facilitates trade, it is not by itself wealth, only a measure of wealth. Money is subject to the laws of economics, even if Paul Krugman doesn't believe it.

Now, there is no doubt that the U.S. Dollar is losing ground overseas, and if we really were in a period of deflation, as Krugman claims, then the dollar would be gaining strength, not losing it. (Deflation occurs when the value of money relative to goods it is used to purchase increases, and that clearly is not happening.) We are seeing asset prices such as housing fall, but those prices need to fall because they were out of kilter with everything else.

(Yes, that means people like me who are homeowners and probably swimming in negative equity have to live with it. The bank gets my house payment every month, and I just consider it to be something akin to a rent payment. I don't like it, but that is the way it is.)

I want to come back to this whole "deflation" issue soon enough, but now want to deal with how new money comes into our economic system. Remember, the Fed mostly has piled up new reserves in banks, raising (actually, spiking) the monetary base. However, a monetary base in the form of bank reserves is a lot different than new money actually floating about in the economy.

When we think of hyperinflation, we think of places like Weimar Germany in 1923 or Argentina and Bolivia in the 1970s and 1980s, or Chile during Allende's three-year rule from 1970 to 1973. In Chile's case the government seized a number of private businesses, mines, and factories, and then directly printed money to pay the workers. (More "proof" that government is not "revenue-constrained," I guess.)

When the government seized the factories, it tripled the wages of workers, but the political organizing and other moves actually lowered workplace productivity. At the same time, the government threw up new tariffs and trade barriers, so people soon were awash in money, but little else.

During that period when inflation got to about 1,000 percent, people got out of money if they could, using items like tobacco, auto parts, and other hard goods that they could use to barter. In Bolivia, where there were (and are) a large number of state-owned enterprises, workers in the mid-1980s would be paid twice a day. They would rush to the streets and trade their money with tourists for dollars or other hard currencies, and then the tourists quickly would spend the money.

That is very, very difficult to happen in our economy. Even during the last big inflation of the late 1970s and early 1980s, the new money came in through the bank lending process. Government workers were not paid with newly-printed dollars, nor did they rush out into the streets to trade for pesos.

What happens at a time when businesses are not borrowing for long-term projects, as is the case today? This is what Milton Friedman called "pushing on a string," or what Paul Krugman calls a "liquidity trap."

Is there a way for the current situation to bust into hyperinflation? Obviously, I certainly hope not, as I and my family would go down like everyone else. Certainly, one can see the problems that would arise if the Fed were to directly purchase large amounts of U.S. Treasuries on the primary market to finance the government's borrowing, as it would not take long to see how this transmission device would inject a lot of new money into the economy and certainly would result in much higher prices over time.

There is one more issue, and that is the claims by Krugman that we are falling into "deflation." Frankly, I don't see it. Prices for consumer goods, not to mention food and other commodities, are going up, not down. Yes, the value of those assets that were highly-inflated during the bubble are going down, but that is a good thing (even if my own house is included in this "good thing"). I use that term not because it makes everyone happy, but rather because factor prices need to get into balance, and the government's "stimulus," bailouts, and attempts to build a "recovery" by pouring money into "green energy" are only making the situation worse.

No, we are not about to burst into the holocaust of inflation as we saw in Latin America or recently Zimbabwe, but neither are we falling into deflation as Krugman says. Instead, we are going to muddle along until someone in power learns that one cannot subsidize an economy into prosperity.

Monday, November 8, 2010

I have no idea if Paul Krugman reads the Bible or any other religious material, but being that I am in the midst of reading through the section of the various major and minor prophets of Israel, I can see how Krugman fancies himself to be an Isaiah or Ezekiel. Here is Krugman giving prophecies of woe -- but also presenting what he claims to be are "solution" to the current ills.

Unfortunately, he believes, no decision makers in the government are listening. Instead, from President Obama to Ben Bernanke, these people are listening to the "Pain Caucus" (as he calls people who note that the economy cannot expand with malinvested capital), the "inflationistas," and those lyin' furriners (the Chinese and Germans) who are more responsible than anyone else for our present condition.

For example, he writes of the Chinese and Germans:

After all, you have China, which is engaged in currency manipulation on a scale unprecedented in world history — and hurting the rest of the world by doing so — attacking America for trying to put its own house in order. You have Germany, whose economy is kept afloat by a huge trade surplus, criticizing America for running trade deficits — then lashing out at a policy that might, by weakening the dollar, actually do something to reduce those deficits.

So, there you have it; these countries, which actually make goods that people want to buy, are partially at fault for our predicament. Obviously, we need a good trade war to accompany our failed "war on terror." That will bring prosperity for sure.

Here is the ultimate irony, however. Krugman believes that the government is choosing the "hard way" when, in fact, fixing the current problem is quite easy. As he wrote in his book The Return of Depression Economics, most economic crises (according to him) can be "fixed" simply by the printing of money. In other words, Ben Bernanke really can print some of it, go into his helicopter, and dump it out upon grateful people who then will go and spend it, giving the economy "traction," and leading us into prosperity.

Now, this makes Krugman a most interesting prophet. Most prophets of the Bible excoriated Israelites for seeking a life of ease, for following after false gods, and "oppressing the poor" by getting them to work, and then not paying them, or having crooked judges rule in their favor when the poor brought their cases before the courts of those days.

Krugman, on the other hand, claims that the real solution to the current situation is the easier path. Those that say that we no longer can continue the boom through loose credit and wild deficit spending and who must get the "house in order" really are the villains, for they lead us down the path of pain.

In his famous "Hangover Theory" article in Slate, Krugman (after mangling the Austrian Theory of the Business Cycle) declares:

Powerful as these seductions (ATBC) may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less.

See? The "solution" really is quite easy. When the value of malinvested assets fall and the follies of a boom are exposed, we then pretend that we are prosperous. Is the income that flowed from the money borrowed to finance these malinvestments drying up? No problem! Let the government either try to prop up these malinvestments by getting the Fed to purchase government bonds, or sell the bonds to a central bank in Upper Slobovia and use those dollars to fund the politicians' latest projects (like rail tunnels). And, if the projects run way over budget, THAT IS EVEN BETTER BECAUSE IT MEANS WE ARE SPENDING MORE MONEY!

Usually, prophets tell people that they must choose the more difficult path, but the Prophet Krugman differs. If I may use an analogy from the New Testament, it would be like Jesus telling his disciples that they should enter "through the wide gate," as "the narrow gate is too painful."

I sense a real anger in Krugman's words. Here is a Nobel Prize winner telling people that the way out of this depression is easy: just borrow, print, and spend (and spend and spend). Yet, somehow, the Bad People are winning the day, falsely convincing people that we cannot borrow and spend our way to prosperity. They are not moved by Krugman's prophecies that the road to ease is for us to start a trade war with China, tell the Germans "Zum Teufel mit Ihnen," and spend, spend, and spend some more.

Sunday, November 7, 2010

Paul Krugman definitely has been busy since the last election, and so have I -- but not in reading Krugman's material as the day job (and some consulting work on the side) have taken front-and-center. Nonetheless, as I read the Nobel Prize winner's blog this morning, I must admit that I have missed a real treasure trove of Krugman's Shibboleths, including a number that he has written himself.

It is hard to know where to begin, but I think I will begin with Krugman's own Shibboleth: inflation. Some years ago, I read a book by someone lambasting the Keynesians in which he said that their only real "arrow in the quiver" was inflation, and I think that Krugman has continued that long tradition. According to Krugman, the only way that an economy can recover from a depression is via inflation, coming in the form either of central bank monetary expansion or increased government spending.

As Krugman has claimed many times, the U.S. economy -- for that matter, all of the world (except for Zimbabwe) -- is mired in a "liquidity trap" in which individuals and businesses are selfishly holding onto their cash and not spending it. Obviously, THAT is intolerable, so the government either must find a way to confiscate it by force (raise taxes, which Krugman has advocated) or via inflation (which Krugman pursues with religious zeal).

Along the way, he attacks Jim Rogers, a person who actually understands capital, unlike Krugman, who seems to believe that capital magically springs from the ground when people start spending. Yes, Krugman wants us to believe that if the government tries to recreate the government-run financial cartel in which external capital markets were scarce (and the system clearly was running into a wall by the mid-70s), and if government showers the economy with newly-printed dollars, blocks Chinese imports, raises taxes, forces taxpayers to pay for high-cost, subsidized "clean energy," and demonizes any business that actually is profitable (except for those businesses getting government subsidies), that the U.S. economy will roar back into a state of real growth and full-employment.

Yes, Krugman definitely identifies himself with the Inflationists, claiming that if government debases the currency -- and that is what inflation really is -- and, thus, depreciating the cash that people have earned, that we will have prosperity. In a world in which all labor and capital are homogeneous, that would be true. However, in a world in which a government-caused boom creates huge malinvestments -- as we saw with the housing boom -- we have to face reality.

According to Krugman, we can keep the original boom alive via spending and more spending. Assets mean nothing; depreciated currency is everything. In the meantime, blame everything on Goldstein: the Chinese and Republicans. And that is what passes for Great Economic Wisdom with modern Progressives.

Friday, November 5, 2010

Well, following the elections, which were pretty disastrous for the Democrats, at least regarding the U.S. House of Representatives, I figured Paul Krugman's first column would be yet another attack on the Republicans. Instead, he attacked President Obama for not having enough "audacity" in his economic programs.

We have been down this road before. Krugman's favorite theme -- other than Republicans come from the Pit of Hell -- has been that Obama did not spend enough, inflate enough, or regulate enough. What Krugman wants us to believe is that the most leftist president of my life somehow did not have the courage to tax, borrow, and spend, and that Obama's lack of "courage" is what blew up the House.

Writes Krugman:

Mr. Obama’s problem wasn’t lack of focus; it was lack of audacity. At the start of his administration he settled for an economic plan that was far too weak. He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies.

The aftermath of major financial crises is almost always terrible: severe crises are typically followed by multiple years of very high unemployment. And when Mr. Obama took office, America had just suffered its worst financial crisis since the 1930s. What the nation needed, given this grim prospect, was a really ambitious recovery plan.

Could Mr. Obama actually have offered such a plan? He might not have been able to get a big plan through Congress, or at least not without using extraordinary political tactics. Still, he could have chosen to be bold — to make Plan A the passage of a truly adequate economic plan, with Plan B being to place blame for the economy’s troubles on Republicans if they succeeded in blocking such a plan.

But he chose a seemingly safer course: a medium-size stimulus package that was clearly not up to the task. And that’s not 20/20 hindsight. In early 2009, many economists, yours truly included, were more or less frantically warning that the administration’s proposals were nowhere near bold enough.

And there's more:

I felt a sense of despair during Mr. Obama’s first State of the Union address, in which he declared that “families across the country are tightening their belts and making tough decisions. The federal government should do the same.” Not only was this bad economics — right now the government must spend, because the private sector can’t or won’t — it was almost a verbatim repeat of what John Boehner, the soon-to-be House speaker, said when attacking the original stimulus. If the president won’t speak up for his own economic philosophy, who will?

There is much economic "hocus-pocus" in these statements, a veritable treasure trove of Frederic Bastiat's "Fallacy of the Broken Window." For all his "the stimulus should have been bigger" line, never does he in this or any other column explain how that move would result in a long-term recovery. Oh, yes, he says it would give the economy "traction," as though an economy is a perpetual motion machine that just needs a little push.

So, what should Obama do? Krugman (of course) has the right answers:

There is an alternative: Mr. Obama can take a stand.

For one thing, he still has the ability to engineer significant relief to homeowners, one area where his administration completely dropped the ball during its first two years. Beyond that, Plan B is still available. He can propose real measures to create jobs and aid the unemployed and put Republicans on the spot for standing in the way of the help Americans need.

Would taking such a stand be politically risky? Yes, of course. But Mr. Obama’s economic policy ended up being a political disaster precisely because he tried to play it safe. It’s time for him to try something different.

The only way to "engineer relief" to homeowners is to give them checks or pay their mortgages if they default. It does not take a Nobel Prize to know that a government program that taxes homeowners who are paying their mortgages in order to give to people who are unable to do so is not going to save the housing industry, but it will send a message to people who work and pay their bills that the government thinks them to be an unlimited ATM for the president to buy votes.

Obama playing it safe? The guy who has pushed through a 2,500-page bill that no one has read in its entirety (and no one person knows exactly what is in it) to engineer a complete government takeover of medical care is "playing it safe"? Maybe in Krugman's world, but definitely not in the world where the rest of us live.

Monday, November 1, 2010

Paul Krugman seems to be a True Believer that any disagreement with the principles he espouses MUST come from bad faith. I mean, who could be against more government spending that would give the economy "traction" and put us back into prosperity?

Thus, he reasons, there must be a much darker reason that some people out there seem to believe that piling on more government debt and spending might not have the effects that Krugman claims will be at the end of the tunnel. Isn't he a Nobel winner? Is he not on the Princeton faculty? Did he not receive his doctorate at prestigious MIT? So, to disagree with him is to engage in No-Nothingness!

As the election has approached, Krugman has become even more shrill than usual, laying out personal attacks and portraying anyone who might disagree with him as being motivated by pure evil. Why are they evil? Read the second paragraph again.

“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.

It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.

And that kind of moralizing is the reason we’re mired in a seemingly endless slump.

First, I see Krugman continue his practice of taking stray quotes and fashioning huge movements from them. Being that the vast majority of so-called Tea Partiers could not tell you who Rick Santelli is, I doubt that hundreds of thousands of people have demonstrated across the country in the Name of Rick. (I guess we are supposed to believe that had he not said anything, the Democrats would not be facing huge midterm election losses.)

Second, I have not heard any U.S. politician claim that America must be good for its debts to China and other entities that have purchased U.S. Treasury debt, and the notion that suddenly we have become a nation of "debt moralizers" is really silly. Does anyone really think that if the Republicans take over Congress (or at least the House) -- or even the White House in two years -- that the USA suddenly will stop being the world's largest debtor nation in history?

But, even with these Krugman pronouncements, what I find amazing is his belief that the real problem is that businesses and individuals refuse to take on even more debt, and, specifically, that the infamous Housing Bubble was nothing more than a zero-sum game. He writes:

The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.

This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Thus, in Krugman's view, the Keynesian Cross really is a Model for the Whole World. The bubble really was nothing more than a huge wealth transfer, and now the people who got the wealth are selfishly squirreling it away. He goes on:

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

So there you have it. There WERE no malinvestments. All of the assets created in the boom have exactly the same value that they had before the crash occurred. However, those Bad, Bad Moralizers want to see people suffer for their sins:

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.

I can't say that I have watched too many "moralizers" flying into a rage, as the Rage Guy is Krugman himself. People who disagree with him, he writes, can only be motivated by Really Bad Intentions, and if you wonder why that is so, read the second paragraph of this post (again).

My point is this: Krugman cannot have it both ways. He is not free to claim both that all that has occurred is a transfer of wealth, and, at the same time, the value of housing truly has fallen. Furthermore, we are not just dealing with a "capacity" issue, as Robert Higgs' "Regime Uncertainty" theory has merit here.

For the past four years, the political Left has controlled the U.S. Senate and the U.S. House of Representatives, and for the last two years, the White House as well. All three entities have been a wellspring of anti-enterprise rhetoric, and we are reading on the NY Times editorial page that government must be more aggressive in criminalizing entrepreneurial error. This hardly is an atmosphere in which any firm would want to invest, given that if a someone were to misread the future, that mistake would mean he or she goes to prison.

Furthermore, Krugman's notion that more spending will cure everything by giving the economy more "traction" is nothing more than the application of circular logic to economic theory. Unfortunately, circular logical today is passed off by our "elites" are Real Wisdom.

When it became evident three years ago that the Housing Boom could not be sustained, the Bush administration and Congress had a couple of choices. They could have realized that it was futile to continue down the same path and to permit the economy to adjust to those assets that were sustainable, or it could pretend that all the economy needed to keep the charade going was to inject more "spending." Not surprisingly, they chose the latter, although now Krugman says that they were not playing Charades aggressively enough. Moreover, he further claims that the Really Bad People know the truth, but just enjoy making others suffer.

No, an economy is not a zero-sum game, nor is it just one big circle in which (to take Israel Kirzner's example) someone eats breakfast so he can go to work, and then goes to work so he can eat breakfast.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).